Transcript Slide 1
Economic Institutions of Strategy
Jackson Nickerson
Frahm Family Chair of Organization and Strategy
Agenda
Describe a new book for young scholars interested
in organization and strategy
Introduce some current research on Strategic
Problem Formulation
Have a brief discussion of processes in NIE
Provide some tips and tricks on how the book and
research might advance your research productivity
Economic Institutions of Strategy
Volume co-edited with Brian Silverman
Goals are to:
Acknowledge the role of transaction cost economics
(TCE) and Oliver Williamson in the field of strategy
Help junior scholars identify promising research topics
that are feasible empirically
Suggest that TCE is not just a “background” theory
but remains a growth engine for understanding
organization and strategy
Publication date: September 2009
Volume part of Advances in Strategic Management
Table of Contents
Foreword by Oliver E. Williamson
Introduction: Jackson Nickerson / Brian Silverman
Part I: Development of new technology
1. Transaction Costs in Technology Transfer and
Implications for Strategy,
Ajay Agrawal
2. Organizational Economics’ Insights from
Acquisitions Research,
Jeffrey J. Reuer
TOC - continued
Part II: Development of new business
opportunity/business models
3. Opportunities and New Business Models:
Transaction Cost and Property Rights Perspectives
on Entrepreneurship,
Nils Stieglitz and Nicolai J. Foss
4. The Problem Solving Perspective: A Strategic
Approach to Understanding Environment and
Organisation,
Michael J. Leiblein and Jeffrey T. Macher
TOC - continued
Part III: Competitive advantage and performance
5. The Future of Inter-firm Contract Research:
Opportunities Based on Prior Research & Nontraditional Tools,
Libby Weber, Kyle Mayer, Rui Wu
6. Alliances and performance
Joanne Oxley
7. A Strategic Look at the Organizational Form of
Franchising,
Steven Michael and Janet Bercovitz
8. Internal Organization from a Transaction Cost
Perspective, Nicholas Argyres
TOC - continued
Part IV: Corporate strategy
9.Strategic Organization of R&D
Bruno Cassiman and Alfonso Gambardella
10. Limits to the Scale and Scope of the Firm,
Todd Zenger and Jeffrey Xiaofei Huang
Part V: Industry analysis
11.Diversification, Industry Structure, and Firm
Strategy: An Organizational Economics Perspective
Peter G. Klein and Lasse B. Lien
12. Intellectual Property Regimes and Firm Strategy:
Putting Hall and Ziedonis (2001) in Perspective
Rosemarie ZIEDONIS
TOC - continued
Part VI: Location, national institutions, and strategy
13. Value Creation and Appropriation Through
Geographic Strategy: Evidence from Foreign Direct
Investment
Miguel A. Ramos and J. Myles Shaver
14. Beyond the Economic Institutions of Strategy:
Strategic Responses to Institutional Variation
Witold Jerzy Henisz
15. Integrated Political Strategy
John M. de Figueiredo
16. Contracting with Governments
Eric Brousseauand Stéphane Saussier
TOC - continued
Part VII: Dynamics
17.New frontiers in Strategic Management of
Organizational Change
Jackson Nickerson and Brian Silverman
A Theory of
Strategic Problem Formulation
Markus Baer
Kurt Dirks
Jackson Nickerson
A Consumer Products Company
Firm historically performed well with steady but low
to moderate profit growth
Few new product/service ideas get developed and
make it to market, existing-brand refurbishment
Workforce tends to be older, conservative,
homogenous in attitude
Few incentives to reward innovation over long run
Very lean but productive; few slack resources
High production capacity utilization
How can the organization profitably grow faster?
An MBA Curriculum Committee
Charged with creating curriculum to improve student
analytical and communication skills
Recruiters, faculty, and dean report multiple
instances where skills are lacking
Committee comprised of faculty from different
functional areas as well as administrators
Ex ante, neither dean nor committee members
agree on causes of symptom
Yet each constituency has preferred solutions
How can the school develop these skills?
A Health Care Company
A large number of hospitals
Mission statement centered on providing a particular
kind of quality care, key point of differentiation
Within-system hospitals differ on patient satisfaction
metrics
On average no different from other systems
No consensus on what “quality” means
What is quality care and how can it be implemented
to differentiate the organization?
How would you help them?
Each situation is strategic in that decisions can
impact the organization’s strategy.
Groups were assigned in each case to solve the
problem.
Each situation is a complex, ill-structured problem.
Complexity (Simon 1962)
• Many symptoms
• One symptom does not describe another symptom
• Symptom may interact to produce additional effects
Ill-structured (Fernandes and Simon 1999)
• No consensus approach for addressing symptoms
Agenda for Problem Formulation
The strategic problem formulation challenge
Extant literature on problem formulation
Definitions
Formulation objective
Assumptions
Impediments
Design goals
An illustrative process that satisfies design goals
Implications and future research
Problem formulation challenge
Most scholars agree that problem solving requires
Defining the problem
Generating alternative solutions
Choosing alternatives
Implementing choices
We find vast amounts of research on latter three.
Almost universally, the research begins with
assuming an already formulated problem.
e.g. the behavioral theory of the firm.
Let’s consider research in strategy and policy
Research on problem formulation
Problem formulation is rarely researched
1970s saw several investigations into problem
formulation (also called diagnosis and structuring)
Mostly descriptive and atheoretical
Mostly focused on individuals
Very little empirical research—student experiments
Much of the research died out in the 1980s
Leading scholars .. Cowan, Lyles, Mitroff, Nutt,
Volkema, Pounds .. moved on, retired, passed away.
Little progress was made
Process approaches and OD research diminished
Importance of problem formulation
The formulation of a problem is often more essential
than its solution.” Einstein and Infeld (1938, 92).
Diagnosis ... determines in large part … subsequent
course of action” (Mintzberg et al. 1972, 274).
Poor formulation can lead to error of the third kind,
solving the wrong problem. (Mitroff et al.)
Problem formulation has the potential for greatly
affecting problem solving:
quantity and quality of solutions produced, and
implementation of solutions chosen.
Our project …
Acknowledges that heterogeneous teams are the
primary vehicle for solving these problems.
Theoretically identifies set of core impediments
arising from teams that lead to limited formulations.
Develops a set of “design goals” that guide the
development of mechanisms.
And offers a structured process that satisfies these
design goals.
Definitions
A Symptom is something the indicates a presence of
a disorder or opportunity.
A Web of Symptoms refers to those symptoms for
which evidence implies correlation among them.
A Problem is a condition, symptom, or set of
symptoms that need to be dealt with or solved.
Problem (re)formulation is translation of an initial
condition, symptom, or set of symptoms into a
systematized set of statements that identifies a
particular cause or causes of a symptom or set of
symptoms. Equivalent to a diagnosis.
Definitions (cont’d)
Structured Process comprises a set of facts,
circumstances, or experiences that are observed
and described or that can be observed and
described and are marked by gradual changes
through a series of states (Nickerson et al. 2007).
Formulation objective
Problem Formulation Comprehensiveness
the extent to which alternative and relevant problem
formulations are identified with respect to an initial
symptom or web of symptoms
comprehensiveness increases as the number of
alternative problem formulations grows
each alternative must illustrate at least one
mechanism that causes as least one symptom
With an “optimal” formulation unknown and
unknowable, our objective is to …
…improve the comprehensiveness of a
problem’s formulation.
Assumptions
Humans are boundedly rational
Individuals face real physiological limits in acquiring,
accumulating and applying knowledge/information
• cognitive capacity (i.e., attention, memory, time)
• costly to acquire, accumulate, and apply cognitive structures
Individuals can be self-interest seeking with guile
Relevant knowledge and information is dispersed
across individuals
Assembled groups/teams will be heterogeneous in
motivation, cognitive structures, and information
Problems are complex and ill-structured
Impediments
Theoretical ideal of heterogeneous groups is that
they lead to more comprehensive formulations
Recent research indicates heterogeneous groups
perform no better than homogeneous ones
Groups experience some type of process loss,
heterogeneous groups experience more
Heterogeneity that promises superior performance
also generates impediments that derive from:
Information
Cognitive structures
Motivation
Heterogeneous information
(Assume homogeneous motivation to begin with)
Heterogeneous information sets + bounded rationality
Information sampling
Difficult to judge which informational elements are likely to be
relevant to a particular problem context
Individuals will begin by sending cues about what they believe to
be important
Group members are likely to recognize cues that they already
posses and understand
Conversation to transfer and verify information sent and received
Sharing unique information is far costlier in terms of cues and
communication
Information sampling narrows formulation comprehensiveness
Heterogeneous cognitive structures
(Assume homogeneous motivation to begin with)
Heterogeneous cognitive structures + bounded rationality
Representational gaps (concepts, language, assumptions)
Individuals are likely to formulate problems in a way that
capitalizes on the knowledge that they possess
Differences in knowledge sets likely produce problem
understandings that are, at least partially, incompatible
• Difficult and costly for individuals to share knowledge and recombine
representations to explore additional problem formulations (unless
drinking together in Cargese)
• Can promote misunderstanding, conflict and distrust, which increases
cost of communication
Representational gaps narrow formulation comprehensiveness
Heterogeneous motivation
Heterogeneous motivations + bounded rationality
Political maneuverings to protect and enhance self-interest
Dominance activities
• High stakes increase effort, low stakes acquiesce
Propensity to jump to solutions
• Economizes on bounded rationality
• Strategically offered to push desired outcome
Transfer information and cognitive structures strategically
• Attempts to limit alternatives
• Can increase distrust and conflict
• Amplifies information sampling and cognitive gaps
Heterogeneous motivation narrows formulation
comprehensiveness
Design goals
Mechanism(s) must
Prevent members from jumping to solutions
Limit domination/equalize participation
Reduce information exchange and sampling problems
Motivate individuals to reduce representational gaps
Limit strategic behavior and trust concerns
Wow! How can this be done?
How can impediments be overcome?
Three organizational mechanisms are considered:
economic incentives
group selections/matching
structured processes
Economic incentives
Comprehensiveness of formulation is not contractible
ex ante
Transfer of cognitive structures, which is needed to
recombine knowledge, is not contractible ex ante
Effort in “thinking” is not contractible ex ante and not
verifiable ex post
Overcoming impediments
Selection/matching of group members
Pool of potential group member typically is small
because of the need for firm-specific knowledge.
• A small pool limits the ability to form a group with desirable
correlations of motivation, cognition, and information.
Measurement difficulties make it costly to verifiably
form a group with a desirable correlation.
• E.g., Ex ante homogeneous goals and objectives with
heterogeneous cognitive structures and information.
Selection does not mitigate all impediments.
We focus our efforts on structured processes.
A Structured Process
Finding
Framing
Formulating
Solving
Implementing
We will focus on Framing and Formulating
Finding
A symptom(s) triggers initiation of a group or preexisting group to take up the problem
Assume complex, ill-structured problem context
Other processes might be better suited for those
problem contexts that are not complex and structured
Group composition is chosen
Heterogeneous for complex, ill-structured context
Heterogeneous manifests in motivation, cognitive
schema, and information
Management/team commits to process*
Finding is not much informed by our process
Does process satisfy design goals?
PHASE 1: FRAMING
Facilitator specifies focus
and enforces groundrules
(i.e., focus on symptoms
no discussion of
formulation or solutions)
Use modified nominal
group technique (mNGT)
to reveal comprehensive
set of symptoms
Group consensus
decision statement
summarizing symptoms
Verify validity of set of
symptoms via evaluation
by external stakeholders
DESIGN GOALS
PHASE 2: FORMULATION
Prevent members
from
jumping to solutions
Facilitator specifies focus
and enforces groundrules
(i.e., focus on
formulation; no
discussion of solutions)
Limit
domination/equalize
participation
Reduce information
exchange and
sampling problems
Motivate individuals
to reduce
representational
gaps
Limit strategic
behavior and trust
concerns
Use modified nominal
group technique (mNGT)
to identify possible
mechanisms causing
symptoms
Group consensus
decision statement
summarizing formulation
of problem
Verify validity of problem
formulations via
evaluation by external
stakeholders
How has the process worked?
Consumer products company
MBA curriculum committee
Health care company
Preliminary validation?
Implications
New approach to theorizing about problem
formulation–generate process design goals
While economic incentives and selection may
positively contribute to problem formulation …
…they appear neither necessary nor sufficient
Cannot guarantee comprehensiveness, only
improvement in comprehensiveness
Process may provide implementation benefits
Process consumes time
Implications for group formation
Facilitator is necessary
Directions for future research
Empirical analysis is needed and students won’t do.
What are the implications for problem solving?
What about other types of problems?
Other factors that may matter on the process
Credibility of commitment to process
Time
Outcome
Selection of knowledge/team members
Links to other literatures
Formulation in operations
Creativity in psychology, especially in groups
Insight in psychology and marketing
Fallibility in economics
Cognitive biases in psychology and operations
Organizational development
Education
Existing research
Heiman and Nickerson
(2002). “Towards reconciling transaction cost economics and the knowledgebased view of the firm: The context of inter-firm collaborations,” International
Journal of the Economics of Business, 9(1) : 97-116.
(2004). “How do firms manage knowledge sharing while avoiding knowledge
expropriation in inter-firm collaborations,” Managerial and Decision Economics,
25: 401-420.
Nickerson and Zenger (2004). “A knowledge-based theory of governance
choice,” Organization Science 15(6): 617-632.
Macher (2006). “Technological development and the boundaries of the firm:
A knowledge-based examination in semiconductor manufacturing,”
Management Science 52(6): 826-843.
Hsieh, Nickerson and Zenger (2007). “Problem solving and the
entrepreneurial theory of the firm,”Journal of Management Studies.
Nickerson, Silverman and Zenger (2007). “The ‘problem’ of creating and
capturing value,” Strategic Organization 5(3): 211-225.
Processes in NIE
John: Constitutions are processes for making ex
post adaptations
Scott: Contracts are processes for making ex post
adaptations
Ken: (But for meta some games) Institutions are
processes for selecting among selecting among a
large number of equilibria.
Is NIE ultimately about the study of processes and
their ability to shape ex post adaptations?
Is this what NIE scholars typically claim?
How can we improve the study of processes?
Formulation and your research
Assertion: Formulation of problem is central to your
success
We often get “enamored” and locked into solutions
before insuring a “good” problem formulation
Practical tips
Verify and improve your formulation and approach to
solution broadly and quickly
• Write a 4-6 page introduction
• As for next day feedback from colleagues and faculty, those
at your school and those you met
• Refine based on feedback and solicit feedback again until
readers agree that you will create value if you deliver on the
introduction
Thank you for your time today!